Market and Value Based Pricing

As with any start-up, the product and the company needed to establish credibility and establish cash flow. Many companies and entrepreneurs in this situation begin service businesses to survive to get to the next level. In most cases these businesses use their own products and services to gain customers, cash flow, and product experience at a lower level before “betting the farm” on a large production run of their new products.

Vamoose was no exception. As a newly developed chemical product it needed market validation, customer exposure, and references. Just as importantly, the entrepreneurs needed cash flow after bankrolling development, patent applications, initial inventory, legal fees, etc.

Having initially priced their products on a traditional cost plus basis and offering somewhat steep discounts to initial “volume” customers, the product still needed further assistance gaining traction in local service markets. Consumer clients were handled via web sales with limited Search Engine Marketing (SEM) in this case keyword advertising and no Search Engine Optimization or organic search engine optimization. With limited consumer exposure and sales addressing the product pricing issues at this point would be little more than an academic exercise.

So to establish that the products met their claims, obtain critical cash flow, and to gain product usage and performance data a services business was created as a separate entity by the entrepreneur. A service business targeting car dealers, hotels, apartment complexes and restaurants was established with direct sales calls, a 100% satisfaction guarantee, and same or next day service was initiated.

As expected, all initial prospects demanded the treatments, service and product, free for the opportunity to demonstrate the products performance. As most marketers and purchasing agents know, once the products values is determined to be free or at a low price point, the ability to charge or raise prices is difficult. So after a few rounds of free treatments, with completely satisfied customers, a price point of $50 per car and a fee per square foot for facilities was established.

When determining a $50 price point, the primary consideration was what a mid to lower level customer at a dealership could either approve or pay out of petty cash funds. What was not considered was the equivalent of $20 of retail product usage, an hour of onsite service, travel to the job site, a follow-up visit, administration costs, opportunity cost, market value, and a premium for expedited service.

The service business continued to grow with a number of satisfied customers. In fact, the clients were so demanding that the entrepreneur needed to get a separate cell phone to manage the business. The product was validated, or it was as a component of the service business, product knowledge was obtained which helped refine the product, and critical cash flow was obtained.  The service offering became all consuming and a limited regional offering. What was not achieved was the direct purchase of the product by the customer base for internal consumption. While this situation would be ideal for any service organization or franchise it is defeating route for a products company to take.

Upon analyzing the service business, the entrepreneur’s goals, and the viability of the product, critical decisions had to be made. It was determined that; 1) the service business was grossly underpriced, 2) the entrepreneurs goal was to be a products company not a service company, 3) the product itself was potentially underpriced, 4) a dedicated sales effort needed to be made to a completely different set of prospects.

By reviewing the services business, as a complete outsider with no emotional attachment or history with the product or service, we found that the service business was primarily with luxury car dealers, that the dealers expected same or next day service, that the dealers preferred to have a service group perform the service rather than their own detaining group, that the cars being treated were typically being resold for more than $25,000, and that the entrepreneur was being called as the option of last resort – or in other words their own group failed to mediate the odors after multiple treatments and the vehicle’s market value was either decreased – or the dealer needed to wait for a buyer that was a smoker themselves and did not object to the odors – leaving the car on the lot for an extended period of time.  

Interesting data was quickly becoming evident. We found that the service costs is negligible in relation to the market value of the service, that the service and product is not only validated but is the only solution at the end of the road that can resolve a situation that is impeding a large ticket sale, that the service would not be internally displace – no matter how hard we tried to sell the product directly, and that the prospective clients initial impressions of the product and service was that the low initial cost caused an immediate negative  impression – especially in light of the 100% satisfaction guarantee offered and expedited service.

In light of this strong evidence we began raising prices and segmenting the service offering charging more for expedited service. The new pricing, formerly $50 per car, was raised to $100 for same and next day service and $75 for non expedited service. In practice, every client demanded expedited service, the price was doubled, the client actually felt better paying more, and no sales were lost.

While it is probable that the price could be raised even higher, the market, economy, and company’s reputation need to be considered.  New clients can be segmented and charged a rate more equitable to the value – say a Porsche or Hummer dealer may have a higher price tolerance than a Volkswagen dealer. For now the existing clients will be held at the new price points – with every happier – priced closer to market and solution value.

More in the next blog on market pricing and pricing for multi channel and multi level distribution.

Upcoming Blogs:

“Product Packaging and labeling your 3 second billboard to a prospective customer.”

 “Jump starting PR efforts, the effect on Search Engine Marketing and Optimization from PR efforts, and getting attention from the media.”